Understanding the Fed’s Implementation Framework Debate

Bill Nelson

Executive Vice President and Chief Economist

William Nelson is an Executive Vice President and Chief Economist at the Bank Policy Institute. Previously he served as Executive Managing Director, Chief Economist, and Head of Research at the Clearing House Association and Chief Economist of the Clearing House Payments Company. Mr. Nelson contributed to and oversaw research and analysis to support the advocacy of the Association on behalf of TCH’s owner banks.

Prior to joining The Clearing House in 2016, Mr. Nelson was a deputy director of the Division of Monetary Affairs at the Federal Reserve Board where his responsibilities included monetary policy analysis, discount window policy analysis, and financial institution supervision. Mr. Nelson attended Federal Open Market Committee meetings and regularly briefed the Board and FOMC. He was a member of the Large Institution Supervision Coordinating Committee (LISCC) and the steering committee of the Comprehensive Liquidity Analysis and Review (CLAR). He has chaired and participated in several BIS working groups on the design of liquidity regulations and most recently chaired the CGFS-Markets Committee working group on regulatory change and monetary policy. Mr. Nelson joined the Board in 1993 as an economist in the Banking section of Monetary Affairs. In 2004, he was the founding chief of the new Monetary and Financial Stability section of Monetary Affairs. In 2007 and 2008, he visited the Bank for International Settlements, in Basel, Switzerland, where his responsibilities included analyzing central banks’ responses to the financial crisis and researching the use of forward guidance by central banks. He returned to the Board in the fall of 2008 where he helped design and manage several of the Federal Reserve’s emergency liquidity facilities.

Mr. Nelson earned a Ph.D., an M.S., and an M.A. in economics from Yale University and a B.A. from the University of Virginia. He has published research on a wide range of topics including monetary policy rules; monetary policy communications; and the intersection of monetary policy, lender of last resort policy, financial stability, and bank supervision and regulation.

While financial markets and the financial press focus closely on where the Fed sets interest rates, there is also a consequential debate occurring within the Fed about how it goes about setting and maintaining its chosen rate. In particular, after it shrinks its securities holdings swollen by successive rounds of quantitative easing, will the Fed return to conducting monetary policy roughly in the manner that it did before the crisis, or will it stick to the implementation framework it has essentially followed for the past decade? The outcome of that debate will have important consequences for the Fed’s future footprint within the financial system.

To better understand the debate, this note provides background on the mechanics of monetary policy; how Fed policy implementation evolved over the past decade, as it fought the financial crisis and the sharp contraction and extended period of weakness that followed; important ways that the Fed’s own post-crisis bank liquidity regulations have constrained its monetary policy choices; and the pros and cons of two different implementation frameworks. It concludes with a discussion of how current market conditions suggest that the Fed may be forced to decide on a framework much earlier than it had expected.